INTERMEDIATE FLOWS AND INTEREST RISK Flashcards
1
Q
When can you be sure of your return?
A
When you reach the duration
2
Q
How can we define the Macaulay duration?
A
Average lifetime of financial flows weighted by their present value
3
Q
What does the duration of a bond correspond to?
A
The period after which its profitability is not affected by changes in interest rate due to the coupons already received
This is because at some point, if rates appreciate, the bond’s valuation drops but the coupons increase => capital loss is offset by the gain in interest of the coupons received
4
Q
What is the duration formula?
A
SUM(PV*n)/Price (PV discounted at ytm)
